2024-01-02 11:26:54 ET
Summary
- Universal Display's recent surge was likely due to optimism from LED panel makers.
- The company is near commercialization of its blue emitters and will likely enjoy strong growth next year.
- The stock is trading near one-year high valuations but is likely justified.
Universal Display ( OLED ) has jumped about 40% since its 3Q23 earnings release on November 2, 2023. Prior to its release, the stock gained slightly under 30% on the year but has since extended its 2023 gains to 77%.
The company did not particularly deliver good 3Q earnings with quarterly sales not meeting market expectations and a slight trim in full year sales guidance. But, the company was able to secure an OLED material supply and licensing agreement with BOE after BOE announced (in Chinese only) it plans to invest Rmb63B in Gen8.6 IT OLED production line on November 28, 2023.
Missed on 3Q earnings
The company's sales during the quarter was about 5% below market expectations at $141M and it trimmed its full year sales guidance from $560M-$600M to $565M-$590M, implying a 6% decline over a year ago.
Gross margin came in at 73.8% which was below past quarters due to lower royalties and licensing ASPs.
Adjusted EPS of $1.08 was ahead of expectations due to lower tax rates.
...but uptick expected in 4Q23
Based on the company's guidance for the full year, sales in the final quarter of the year can be deduced to be a decline of about 5.7% y/y but a sequential growth of about 13%. The company maintains a materials to royalties ratio of 1.5x so we can predict that royalties sales will pick up in the December quarter as Q3 was exceptionally low.
Commentary from panel makers suggest a turnaround is likely
Recently, both BOE and TCL have noted that larger-sized panel price correction during the slow season (Winter 2023) will be relatively mild and expects prices to soar above 2023 highs in 2024.
BOE thinks that sports events (e.g. Olympics) will drive 2024 growth from a low base in 2023, along with an economic recovery in European and emerging markets.
Other factors to bolster demand may come from commercial PC demand recovery (replacement cycles and Windows 11 upgrade) and AI.
Blue emitter commercialization will be a strong driver of growth
The company is on track to introduce its all-phosphorescent RGB stack into the commercial market in 2024. A full suite will unlock a vast array of opportunities for higher energy efficiency and higher performance across a broad range of OLED applications.
Pre-commercialization revenue for blue emitters hit $1.5M in Q3, bringing the first three quarters revenue to $4.3M. Management stated that revenue from blue LEDs will be variable q/q as the product nears commercialization stage.
Valuation
Consensus estimates for sales are about 17% y/y growth in FY24E with gross margins returning above 77%. Adjusted EPS is expected to expand 19% y/y.
In terms of P/E, the stock is trading at its one-year range highs at about 40x forward P/E. While this might seem high, the stock changed hands at about 70x P/E in 2021 (during the pandemic.)
The company has favorable tailwinds in 2024- most notably its commercialization of blue emitters and general recovery in LED demand as commented by industry participants. Thus, its current valuation is likely justified.
For further details see:
Universal Display Corp.: Blue Emitters In 2024 To Reverse Woes